Global economy is set for a V-shape recovery, Morgan Stanley economists say

Predicting a ‘sharp but short’ recession, Morgan Stanley economists said they expect global GDP growth will recover to 3% by the first quarter of 2021.

A man stands in front of an electronic ticker board showing stock information figures outside the Bombay Stock Exchange (BSE) in Mumbai | Photo: Bloomberg

Hong Kong: The global economy is in a new expansion cycle and output will return to pre-coronavirus crisis levels by the fourth quarter, according to Morgan Stanley economists.

“We have greater confidence in our call for a V-shaped recovery, given recent upside surprises in growth data and policy action,” economists led by Chetan Ahya wrote in a mid-year outlook research note on June 14.

Predicting a “sharp but short” recession, the economists said they expect global GDP growth will trough at -8.6% year on year in the second quarter and recover to 3.0% by the first quarter of 2021.

Morgan Stanley noted three reasons for why the recession will be short:

• This is not an endogenous shock triggered by huge imbalances
• Deleveraging pressures will be more moderate
• Policy support has been decisive, sizable and will be effective in boosting the recovery

Official support isn’t likely to ease anytime soon, with both central banks and finance ministries pumping money into their respective economies, according to the note.

Risks to their outlook include developments with the coronavirus and the vaccine.

“In our base case, we assume that a second wave of infections will occur by autumn, but that it will be manageable and result in selective lockdowns,” the economists wrote, citing a scenario where a vaccine is broadly available by summer of 2021.

“In contrast, we assume in our bear case that we re-enter into the strict lockdown measures implemented earlier this year, resulting in a double-dip,” they wrote.

Profound Uncertainty

Morgan Stanley’s views contrast with more cautious outlooks by others including the International Monetary Fund, which last week warned that the global economy is recovering more slowly than expected and there remains “profound uncertainty” around the outlook.

The recent jump in Beijing’s coronavirus cases has raised fears of a resurgence of the pandemic in China, which may slow recovery in the world’s second-largest economy. China’s vice premier said risks are high for the outbreak in Beijing to spread, according to a Xinhua report.

Economists at JPMorgan Chase & Co. led by Bruce Kasman highlighted a risk that surging debt and deficits may force governments to wind back their massive fiscal stimulus.

“This turn in fiscal policy, together with the limited steps expected from central banks, is an important factor underlying our forecast for an incomplete recovery through 2021,” JPMorgan economists said in a note. –Bloomberg